Dear all, Upon inheriting the Looking Glass from our predecessors, we identified a number of key issues. Firstly, there were simply not enough articles being published, due both to a lack of submissions from the school community and limited responsiveness from the previous Academic Team. Secondly, the Looking Glass had not been advertised or explained effectively enough to the wider school community. As a result, we plan to implement a more consistent and engaging stream of articles on the Looking Glass. As part of this initiative, we are looking to recruit a select group of keen writers from across the lower school who would be willing to produce one high-quality piece of writing, discussion, or media each month for publication on the Looking Glass. We believe this will be hugely beneficial both to the school community, which will gain access to a wider range of opinions and viewpoints, and to prospective writers, who will be able to reference their experience contributing to the Look...
By Shrey Parikh
What is Cryptocurrency?
Have you ever wondered about cryptocurrency? What makes people talk about it,
and what has led to its popularity during this decade? The answer is as follows: A
cryptocurrency is a type of digital money or an alternative way of making payments,
and it enables people to exchange goods and services securely without involving a
third-party system.
It is a peer-to-peer network or a system that enables everyone globally to make or
receive payments. Whereas physical currencies are moved and traded in the real
world, cryptocurrency deals exist only as digital entries in an online ledger that
describes specific transactions. When you transfer cryptocurrency funds, the
transactions are recorded in a public ledger. Cryptocurrency is typically stored in
digital wallets, where the owner of the cryptocurrency has the private key to their
wallet; this setup makes it impossible for any unauthorised party to access the
wallet1
.
Cryptocurrency in the modern economy
Although it is a relatively new form of money, cryptocurrency has quickly gained
popularity and is very relevant in today's digital world. Some of the most popular
cryptocurrencies include Bitcoin, Ethereum, Tether, Binance Coin, and others.
However, the first cryptocurrency was Bitcoin, invented by Satoshi Nakamoto back in
2009 (there are various other versions explaining who was the original founder of
Bitcoin, but that discussion will be left for some other time).
There are many reasons why cryptocurrency is used. Investors use cryptocurrency
to trade in stocks both as a short-term and long-term investment strategy.
Cryptocurrency can be quite volatile in its value, so it’s usually used by high-profile
investors to aid their investing and is bought on online crypto trading platforms.
There are, of course, other ways to earn cryptocurrency, such as Bitcoin, which is
usually acquired through a process called “mining”. Large corporations generally
utilise GPU processors that are expressly designed for the purpose of Bitcoin mining
to generate revenue. The mining process involves a computer addressing a
sequence of mathematical equations to derive a hash, which can subsequently be
utilised to acquire Bitcoin as a reward. The reward for Bitcoin is reduced by half
every four years (the most recent occurrence was in April 2024, lowering it to 3.125
BTC), thereby maintaining the scarcity of Bitcoin.
Secondly, cryptocurrencies can be used as a
medium of exchange. They have revolutionised
access to financial systems, particularly for the
unbanked population. In LICs (low-income
countries), where banking infrastructure may be
weak and where banks often leverage their power
to create monopolies, cryptocurrency can be a
viable alternative. For example, in Nigeria, the use
of Bitcoin has increased because it can bypass
strict banking laws and offer more affordable
remittance services. Similarly, El Salvador's
adoption of Bitcoin as legal tender showcases its
potential to bridge financial gaps by allowing
citizens to transfer money easily and facilitate
payments through mobile apps. Cryptocurrencies
create financial inclusion for people excluded from
traditional systems by enabling participation in the
global economy.
This is one of the main reasons for concerns about cryptocurrency overtaking
traditional banking methods. This is exacerbated by cryptocurrencies' ability to
facilitate cross-border transactions at a fraction of the cost of conventional banking
systems. There’s no need to spend hours finding the best deal to send money to
friends or family in another country because cryptocurrency can do it at a fraction of
the price. This is because cryptocurrencies like Bitcoin are not owned or regulated by
any single firm or government, eliminating the need for money transfer providers
such as Western Union, which often charge high fees for cross-border transactions.
For example, platforms like Stellar and Ripple are specifically designed to optimise
cross-border payments with near-instant processing and minimal transaction fees.
This cost efficiency benefits both individuals and businesses, making international
trade more accessible.
And this is just the tip of the iceberg. There are many new opportunities for
cryptocurrencies in the future, including concepts like decentralised finance (DeFi),
smart contracts, and stablecoins. DeFi platforms allow users to invest, lend, or
borrow without intermediaries, creating an inclusive and sustainable financial
ecosystem. It is a peer-to-peer network, similar to the one used for Bitcoins, that
uses blockchain to enable businesses and individuals to transact directly with each
other without the need for an outside entity. Smart contracts, powered by Ethereum,
execute agreements automatically when predetermined conditions are met, reducing
reliance on traditional legal frameworks. Stablecoins, such as Tether (USDT) and
USD Coin (USDC), combine the benefits of cryptocurrencies with the stability of fiat
currencies, making them ideal for everyday transactions. These innovations highlight
the transformative potential of cryptocurrencies beyond simple payments.
Challenges to Traditional Banking
The biggest challenge to traditional banking from cryptocurrency lies in the fact that
cryptocurrency is decentralised, which directly challenges the core of the centralised
banking model. Traditional banks rely on centralised authorities, such as
governments, for regulation and trust, which is considered a key aspect of their
operations.
In contrast, cryptocurrencies use blockchain technology to ensure transparency and
security without intermediaries. This rapidly changing system has prompted some
banks to adapt and collaborate with governments to create solutions like Central
Bank Digital Currencies (CBDCs). These aim to combine the strengths of both
systems—the efficiency of cryptocurrencies with the stability and control of traditional
banking. For instance, China’s digital yuan exemplifies how centralisation can
coexist with blockchain technology, offering controlled yet efficient transactions.
Another reason traditional banks feel threatened by cryptocurrencies is their potential
to erode the monopoly banks hold over loans, payments, and savings. Peer-to-peer
networks bypass intermediaries, empowering individuals to transact directly.
Platforms such as Compound and Aave, for example, enable users to earn interest
or take loans without interacting with traditional banks. This shift forces banks to
reconsider their value propositions and compete in an era of evolving financial
systems.
However, cryptocurrencies have their drawbacks.
Mining bitcoin, for instance, is time-consuming and
requires considerable energy; some mining
operations use more electricity in a year than entire
countries, which raises concerns about
sustainability. The regulatory challenges are also
huge, as governments try to address issues such
as tax evasion and money laundering. Another
issue is that cryptocurrencies are very volatile,
often experiencing large changes in price, which
ultimately undermines their function of value
storage. Further complications arise in regards to
wide-scale adoption: risks like hacking and
double-spending attacks. This makes security a
very serious issue.
The Future of Cryptocurrencies and Banking
Cryptocurrencies, CBDCs, and traditional banks are likely to coexist going forward,
creating an ecosystem that is a blend of all of them. While cryptocurrencies offer
decentralisation and innovation, CBDCs provide stability and regulatory oversight.
Governments all around the world are examining regulatory systems that allow
equilibrium between financial stability and throttling innovation. For example, the
Markets in Crypto-Assets regulation of the European Union is an attempt to create a
unified code for the regulation of cryptocurrency.
In the long term, embedding blockchain technology into traditional structures can
also improve the transparency and speed of bank processes. Smart contracts may,
for example, enhance the lending approval process by speeding it up, and DeFi can
offer new investment avenues. Of course, this will only be a reality if issues of
sustainability, security, and compliance with regulatory policies are overcome.
Conclusion
To conclude this essay, I would like to share my perspective on cryptocurrency and
its potential impact on the future. I believe that if nations and governments continue
to neglect the integration of cryptocurrency into the global financial system, an
economic crash could become inevitable under specific circumstances. This
scenario would occur if two major events coincided: significant volatility in
cryptocurrency leading to a crash in the stock market, and a severe recession
caused by external forces, such as a major war, which could devalue traditional
currencies.
While this may seem dramatic, many economists argue that a recession is a natural
part of the economic cycle. However, the next one could pose unprecedented
challenges due to the factors mentioned above. If cryptocurrency remains poorly
integrated, traditional banking systems might struggle, and the collapse of major
financial institutions could trigger a domino effect across global economies.
In summary, cryptocurrency has the potential to revolutionise the future of finance,
but its integration must be handled carefully to avoid catastrophic consequences.
Governments and financial institutions need to act proactively to ensure stability
while embracing innovation.
1] “What is Cryptocurrency and How Does it Work?” Kaspersky,
https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency.
Accessed 18 November 2024.
2] Armstrong, Martin. “Chart: The Rise and Fall and Rise and Fall of Bitcoin.” Statista, 13
May 2022, https://www.statista.com/chart/24966/bitcoin-ups-and-downs/.
Accessed 18 November 2024 for the image
3] Buchholz, Katharina. “Chart: How Common is Crypto?” Statista, 17 March 2021,
https://www.statista.com/chart/18345/crypto-currency-adoption/. Accessed 18
November 2024.
4] “Gemini's Cryptopedia - Learn How Bitcoin & Other Crypto Coins Work.” Gemini,
https://www.gemini.com/cryptopedia. Accessed 18 November 2024.
5] “Regulated Stablecoin (RLUSD) Reserve for Payments.” Ripple,
https://ripple.com/solutions/stablecoin/. Accessed 18 November 2024.
6] Read more on cryptocurrency: Sharma, Rakesh, and Amilcar Chavarria. “What Is
Decentralised Finance (DeFi) and How Does It Work?” Investopedia,
https://www.investopedia.com/decentralized-finance-defi-5113835. Accessed 18
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